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March 25, 2014

Government Pension ‘Millionaires’ Outearn Private Sector

Average public employees in eight states are pension ‘millionaires’; average replacement income 87% of final earnings, AEI study finds

A private sector worker would have to retire with a 401(k) balance of $768,940 to match the retirement income of an average career state government employee.

That is one of the key findings of a new study by Andrew Biggs, a pension and Social Security expert at the American Enterprise Institute, a free-market oriented think tank.

The study compared total retirement income for full-career state employees, including both pensions and Social Security income (where applicable) among the 50 states, but more critically in relation to career private-sector workers, and found an inequitable distribution of income in favor of government employees.

“Full-career public employees retiring today … receive pension benefits that place them among the highest-income retirees in their states,” Biggs writes.

A second key inequity Biggs found was between state employees of varying career lengths, with benefits calculated in a way that heavily advantages career state employees.

Thus, as a result of policies such as lengthy vesting periods, “shorter-term public employees greatly subsidize the generous benefits received by full-career government workers,” he writes.

But the focus of Biggs’ study is the gap between state workers and the private-sector workers who, directly or indirectly, fund their generous retirement income benefits.

That gap was considerable in that Biggs found that “an average full-career state government employee has a combined pension and Social Security income higher than 72% of full-time employees working in that state”—based on the most recent data and for the average state.

Those numbers skew much higher for states like Oregon, where state employee benefits exceed that of 90% of nongovernment workers. West Virginia, California and Nevada were close behind in the high retirement-income percentile inhabited by state employees.

Biggs emphasizes that his estimates are conservatively calculated because they exclude potential sources of additional income for government workers, such as retiree health coverage. He notes for example that California’s own Department of Human Resources advertises that employees can expect a half-million dollars in health benefits over retirement.

Calculating a present value of lifetime retirement benefits, the pension expert found that average career employees in eight states were pension “millionaires.” Nevada led the pack with its average full-career employee receiving more than $1.3 million in retirement benefits, with Alaska, California, Colorado and Oregon state workers exceeding $1.2 million.

“A wealthy, high-cost state such as Connecticut offers a typical full-career employee more than $1 million in lifetime benefits,” he writes, “but so does a relatively low-cost state such as West Virginia.”

Biggs labels as “false" claims by government employee unions like AFSCME that its average member receives a pension of just $19,000 annually, saying the average career state employee receives roughly twice that amount but that partial-career workers are treated particularly inequitably.

The pension analyst does not claim that public retirees are “so well off, but that other retirees are barely getting by.”

He performs an analysis favored by financial advisors, who typically recommend a level of retirement income equal to about 70% of preretirement income in order to “smooth consumption from work years through retirement.”

Here again state government workers do exceedingly well, with the average career public employee enjoying a replacement income of 87% of final earnings.

Indeed, employees of 14 states wind up in the 90% to 100% range, three (Oregon, California and Texas) in the 100% to 110% range, while New Mexico and West Virginia public retirees enjoy far higher standards of living than in their working years — with replacement incomes of 113% and 115%, respectively.

Biggs briefly touches on possible reforms, including more transparent valuations of defined benefit pensions or a shift to the same defined contribution plans that private sector workers typically get.

While noting that higher pensions in some cases compensate state employees for lower pay, “it appears that in a number of states more-generous pension benefits are sufficient to push overall public-sector compensation well above private-sector levels.”

Ultimately, Biggs asserts the pension gap is a matter of fairness.

“Public employees should be willing to accept—and private-sector workers to demand—more equity in the generosity of their pension plans,” he concludes.

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